Too much investment
Developing countries tend to spend a high proportion of GDP on investment as they build up their infrastructure but China has been taking this to extremes as you can see from the chart. It now needs to engineer a change in emphasis with consumers taking up the slack. This is not a particularly controversial idea, in theory. Indeed, it’s been the official policy of the Chinese government for years now. The tricky bit is making the change gradually.
Slowing growth rates
This process of transformation means that the services part of the economy will be growing faster than the Industrial sector and this is what is happening. Will growth be sustained at 7%? Almost certainly not but we reckon the markets have already priced in a drop to around 5-6% pa, still healthy by most standards.
This all paints quite a different picture to what you read in the media: typically, doom and gloom focused on measures of the old economy such as industrial production, steel consumption and manufacturing.
This transformation is causing grief for some organisations, notably those involved in the production of raw materials. But it also creating new opportunities as the Chinese become serious spenders.
So, given all this, what do we think will happen to markets?
- Subdued demand for industrial metals and oil.
China has contributed heavily to demand for commodities while they were building capacity. They now have overcapacity issues and are moving the economy towards less commodity intensive sectors so we don’t believe that past commodity demand will return.
- Chinese services sector to grow and consumption to become more ‘Western’
Development of e-commerce alongside heightened smartphone and internet usage. We are already seeing the start of this with 4G users in China growing from 0-70m in a year. Apple’s sales in China were very good this year which highlights how consumption is changing.
- Green energy to outperform as a sector
China is the world’s biggest polluter. The Chinese population are fed up with this and consequently, the Government are investing heavily in the area. In 2014 China spent $80bn on green energy as much as the EU and US combined.